RBI set to deliver another Rate Cut

The stage is set for the Reserve Bank of India (RBI) to cut interest rates in its first annual policy statement for FY17 to be announced on April 5, delivering a much needed boost to Asia’s third biggest economy at a time when a growing global gloom threatens to hurt exports.

The central bank is poised to cut the repo rate by 25 basis points as softening consumer inflation, coupled with the government’s decision to maintain fiscal prudence in the Union Budget leave more leeway for policy easing to help boost demand and revive investments.

The Indian economy is currently being viewed as a beacon of stability because of the steady disinflation, a modest current account deficit and commitment to fiscal rectitude. This needs to be maintained so that the foundations of stable and sustainable growth are strengthened.

Benign Inflation, fiscal prudence gives room for rate cut

The NDA government in its Union Budget 2016-17 maintained its fiscal deficit target at 3.5 per cent of the country’s GDP in FY 2016-17, the lowest since 2008, while that for the ongoing fiscal was retained at 3.9 per cent.

India’s wholesale inflation stayed in the negative terrain for the sixteenth straight month, as wholesale prices fell 0.91 per cent year on year in February 2016, compared to an annual drop of 0.90 per cent in January 2016. Moreover, the consumer inflation cooled to 5.18 per cent in February 2016 from 5.69 per cent in January 2016, paving the way for further softening of the borrowing costs.

The RBI in 2015 cut interest rates by an overall 125 basis points with the repo rate currently standing at 6.75 per cent. 

Latin Manharlal Group

IIP slump signals renewed economic recovery doubts

January’s 1.5 per cent plunge in industrial output, marking the third successive contraction, is reflective of a sluggish recovery in Asia’s third biggest economy, and presses the case for the Reserve Bank of India (RBI) to deliver another dosage of monetary stimulus in the form of an interest rate cut to help buoy demand and revive flagging investments.

Signaling fresh signs of distress in manufacturing, which makes up over two-third of the IIP, output in the sector shrank 2.8 per cent, year on year in January 2016. A 20.4 per cent contraction in capital goods output is indicative of weak business sentiment amid a global slowdown, a rising corporate debt burden and tepid credit growth as banks battle mounting bad loans.

Further, stagnation of consumer goods output in January is a big blow for the consumption driven Indian economy. With the ongoing global gloom unlikely to lift soon, there is an urgent need to lift domestic consumption, and a 25 bps rate cut by the RBI at its upcoming policy meet on April 5 would come in handy.

With wholesale inflation remaining in the negative territory and the government sticking to its vow of maintaining fiscal prudence in the Union Budget 2016-17 without compromising on development spending, the central bank has been provided with some leeway to ease policy and help power an economic acceleration.

A rate cut could support Dalal Street which has witnessed a handsome post- Budget rally with foreign funds returning after a two-month exodus as solid progress on the fiscal front and macroeconomic stability consolidated India’s position as a haven of stability amidst an uncertain global scenario.

Unprecedented easing measures from the European Central Bank (ECB) and further stimulus expected from the Bank of Japan (BOJ) this week and the diminishing likelihood of a Fed rate hike in the near-term, coupled with a recovery in oil prices could increase the lure for high yielding assets, supporting Indian equities.

Latin Manharlal Group